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United States Court of Appeals
for the Federal Circuit
__________________________
LASERDYNAMICS, INC.,
Plaintiff-Appellant,
v.
QUANTA COMPUTER, INC.,
Defendant-Cross Appellant,
and
QUANTA COMPUTER USA, INC.,
QUANTA STORAGE, INC.,AND
QUANTA STORAGE AMERICA, INC.
Defendants.
__________________________
2011-1440, -1470
__________________________
Appeals from the United States District Court for the
Eastern District of Texas in case no. 06-CV-0348, Judge
T. John Ward.
___________________________
Decided: August 30, 2012
___________________________
MATTHEW C.GAUDET, Duane Morris LLP, of Atlanta,
Georgia, argued for plaintiff-appellant. On the brief were
ROBERT L. BYER, of Pittsburgh, Pennsylvania, andGREGORY M. LUCK, of Houston, Texas, and KRISTINA
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LASERDYNAMICS v. QUANTA COMPUTER 2
CAGGIANO, of Washington, DC. Of counsel was THOMAS
W.SANKEY, of Houston, Texas.
TERRENCE DUANE GARNETT, Goodwin Procter, LLP, of
Los Angeles, California, argued for defendant/cross-
appellant. With him on the brief were VINCENT K.YIP,
and PETER J.WIED.
__________________________
Before DYK, CLEVENGER, and REYNA, Circuit Judges.
REYNA, Circuit Judge.
These appeals come before us after two trials in the
district courta first trial resolving the claims of patent
infringement and damages, and a second trial ordered by
the district court to retry the damages issues. The parties
raise various issues relating to the proper legal frame-
work for evaluating reasonable royalty damages in the
patent infringement context. Also before us are questions
regarding implied license, patent exhaustion, infringe-
ment, jury instructions, and the admissibility of a settle-
ment agreement. For reasons explained in detail below,
we affirm-in-part, reverse-in-part, and remand.
I. BACKGROUND
A. The Patented Technology and the Optical
Disc Drive Industry
LaserDynamics, Inc. (LaserDynamics) is the owner
of U.S. Patent No. 5,587,981 (the 981 Patent), which
was issued in 1996. The patent is directed to a method of
optical disc discrimination that essentially enables an
optical disc drive (ODD) to automatically identify the
type of optical disce.g., a compact disc (CD) versus adigital video disc (DVD)that is inserted into the ODD.
Claim 3, which was asserted at trial, is representative:
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3. An optical disk reading method comprising
the steps of:
processing an optical signal reflected from en-
coded pits on an optical disk until total num-
ber of data layers and pit configuration
standard of the optical disk is identified;
collating the processed optical signal with an
optical disk standard data which is stored in a
memory; and
settling modulation of servomechanism means
dependent upon the optical disk standard datawhich corresponds with the processed optical
signal;
(c) [sic] the servomechanism means including:
a focusing lens servo to modulate position
of a focusing lens; and
a tracking servo to modulate movement of
a pickup.
This automated process saves the user from having to
manually identify the kind of disc being inserted into theODD before the ODD can begin to read the data on the
disc. The patented technology is alleged to be particularly
useful in laptop computers where portability, convenience,
and efficiency are essential. At least as early as 2006, a
laptop computer was not commercially viable unless it
included an ODD that could automatically discriminate
between optical discs.
Yasuo Kamatani is the sole inventor of the 981 Pat-
ent. In 1998, viewing DVD technology as the next major
data and video format, Mr. Kamatani founded LaserDy-namics and assigned the 981 Patent to the company. Mr.
Kamatani is the sole employee of LaserDynamics, which
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is exclusively in the business of licensing Mr. Kamatanis
patents to ODD and consumer electronics manufacturers.
When LaserDynamics was founded, the DVD market
had reached few mainstream consumers, and there was
some skepticism among electronics companies as to the
likely success of this technology compared with the estab-
lished VHS format. By 2000, however, DVD sales and the
ODD market were sharply rising. By 2003, most homes
had DVD players and nearly every computer had an
ODD. An ODD having automatic disc discrimination
capability quickly became the industry standard for DVD
players and computers.1
B. LaserDynamics Licensing History of
the 981 Patent
According to LaserDynamics, it was initially difficult
to generate interest in licensing the 981 Patent, due to
the novelty of the technology and LaserDynamics limited
operating capital and bargaining power. Nevertheless,
LaserDynamics entered into sixteen licensing agreements
from 1998 to 2001. These licenses were granted to well
known electronics and ODD manufacturers such as Sony,Philips, NEC, LG, Toshiba, Hitachi, Yamaha, Sanyo,
Sharp, Onkyo, and Pioneer. All of the licenses were non-
1 While LaserDynamics contends that all ODDs
performing a disc discrimination method are within thescope of the 981 Patent, Quanta Computer, Inc. (QCI)disputes that Mr. Kamatani invented the concept of discdiscrimination, alleging that [t]here are numerous othertechniques disclosed in the prior art for determining whattype of disc is inserted in an optical disc drive. QCI Br.at 10; A648. The validity of the 981 Patent is not beforeus, and so we do not address whether the scope of theinvention as alleged by LaserDynamics is accurate otherthan to consider QCIs non-infringement contentionsbelow.
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LASERDYNAMICS v. QUANTA COMPUTER5
exclusive licenses granted in exchange for one time lump
sum payments ranging from $57,000 to $266,000. There
is no evidence that these licenses recited the lump sum
amounts as representing a running royalty applied over a
certain period of time or being calculated as a percentage
of revenues or profits. These sixteen licenses were admit-
ted into evidence in the first trial, as explained below.
Several other lump sum licenses were granted by La-
serDynamics between 1998 and 2003 to other ODD and
electronics manufacturers via more aggressive licensing
efforts involving actual or threatened litigation by La-
serDynamics. These licenses, in addition to the sixteenlicenses from the first trial, were admitted in the second
trial.
On February 15, 2006, LaserDynamics (and Mr. Ka-
matani) entered into a license agreement with BenQ
Corporation to settle a two-year long litigation for a lump
sum of $6 million. This settlement agreement was exe-
cuted within two weeks of the anticipated trial against
BenQ. Kamatani v. BenQ Corp., No. 2:03-CV-437 (E.D.
Tex. Jan. 20, 2006) (pre-trial conference order indicating
trial was expected to begin in the last week of February2006). By the time of the settlement, BenQ had been
repeatedly sanctioned by the district court for discovery
misconduct and misrepresentation. The district court had
allotted BenQ one-third less time than Mr. Kamatani for
voir dire, opening statement, and closing argument, had
awarded attorneys fees to Mr. Kamatani for bringing the
sanctions motion, had stricken one of BenQs pleaded
defenses, and had sanctioned BenQ $500,000.00 as an
additional punitive and deterrent measure. Kamatani v.
BenQ Corp., No. 2:03-CV-437, 2005 U.S. Dist. LEXIS
42762, at *20, *44-46 (E.D. Tex. Oct. 6, 2005). The dis-
trict court believed that its harsh sanctions were justified
because BenQs extensive misconduct demonstrate[d] a
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conscious intent to evade the discovery orders of this
Court, as well as violate[d] this Courts orders and the
rules to an extent previously unknown by this Court. Id.
at *44-45. The BenQ settlement agreement was admitted
into evidence in the second trial.
Finally, in 2009 and 2010, LaserDynamics entered
into license agreements with ASUSTeK Computer and
Orion Electric Co., Ltd., respectively, for lump sum pay-
ments of $1 million or less. These two licenses were
admitted into evidence in the second trial.
In total, twenty-nine licenses were entered into evi-dence in the second damages trial. With the exception of
the $6 million BenQ license, all twenty-nine licenses were
for lump sum amounts of $1 million or less.
C. Quanta Computer Inc. and Quanta Storage Inc.
Quanta Storage, Inc. (QSI) is a manufacturer of
ODDs that was incorporated in 1999. QSI is headquar-
tered in Taiwan and is a partially-owned subsidiary of
Quanta Computer, Inc. (QCI), with which it shares some
common officers, directors, and facilities. QCIs corporate
headquarters are also located in Taiwan, and its factoriesare located in China. QCI holds a minority share in QSI
and does not control QSIs operations.
QCI assembles laptop computers for its various cus-
tomers, which include name brand computer companies
such as Dell, Hewlett Packard (HP), Apple, and Gate-
way. QCI does not manufacture ODDs, but will install
ODDs into computers as instructed by its customers. QCI
will sometimes purchase ODDs directly from ODD manu-
facturers such as Sony, Panasonic, Toshiba, or QSI, as
directed by QCIs customers. Predominantly, however,QCI will be required to purchase the ODDs from the
customer for whom QCI is assembling the laptop com-
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LASERDYNAMICS v. QUANTA COMPUTER7
puter. In other words, QCIs typical practice is to buy
ODDs from Dell, HP, Apple, or Gateway, which in turn
purchased the ODDs from the ODD manufacturers.
Because QCI eventually sells the fully assembled laptop
computersincluding the ODDsto its customers, this
process is called a buy/sell arrangement. When QCI
purchases ODDs from one of its customers in a buy/sell
context, it buys the ODDs for an artificially high mask
price set by the customer and designed to hide the actual
lower price of the ODDs from the customers competitors.
Thus, the mask price is always higher than the actual
price to the customer.QSI first sold its ODDs for integration into laptop
computers in the United States in 2001. In 2002, La-
serDynamics offered QSI a license under the 981 Patent,
but QSI disputed whether its ODDs were within the scope
of the 981 Patent and declined the offer. QCI sold its first
computer in the United States using an ODD from QSI in
2003. It was not until August 2006 that LaserDynamics
offered a license to QCI concurrently with the filing of this
lawsuit. To date, neither QSI nor QCI has entered into a
licensing agreement with LaserDynamics relating to the981 Patent.
D. ODDs Made by Philips and Sony/NEC/Optiarc
Just as computer sellers Dell, HP, Apple, and Gate-
way outsource the assembly of their computers to compa-
nies like QCI, some sellers of ODDs outsource the
assembly of their ODDs. QSI assembles ODDs for Philips
and Sony/NEC/Optiarctwo of the largest sellers of
ODDs. As discussed above, Philips and
Sony/NEC/Optiarc are licensed by LaserDynamics to
make and sell ODDs within the scope of the 981 Patent.Under the license agreements, both Philips and
Sony/NEC/Optiarc also enjoy have made rights that
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permit them to retain companies like QSI to assemble
ODDs for them.
When QCI purchases ODDs directly from Philips or
Sony/NEC/Optiarci.e., not under a buy/sell arrange-
mentQCI has no knowledge of which entity assembled
the ODDs. QCI pays Philips or Sony/NEC/Optiarc di-
rectly for the ODDs, which are not sold under the QSI
brand name even if assembled by QSI.
II. PROCEDURAL HISTORY
In August 2006, LaserDynamics brought suit against
QCI and QSI for infringement of the 981 Patent. Becauseasserted claim 3 of the 981 Patent is directed to a method
of disc discrimination performed by an ODD, as opposed
to the ODD itself, LaserDynamics relied on a theory of
infringement that QSIs and QCIs sales of ODDs and
laptop computers, respectively, actively induced infringe-
ment of the method by the end users of the ODDs and
laptop computers. See 35 U.S.C. 271(b).
On a pre-trial summary judgment motion brought by
QCI and QSI relating to their defenses of patent exhaus-
tion and implied license, the district court made thefollowing rulings:
(1) the exhaustion doctrine does not apply to
sales made overseas by [LaserDynamics] licen-
sees;
(2) QCI has an implied license with respect
to drives manufactured by non-Quanta entities li-
censed by [LaserDynamics] under worldwide li-
censes and sold by those licensees to QCI for
incorporation into QCI computers. In addition,
QSI is not liable for manufacturing drives forPhilips or Sony/NEC/Optiarc which are, in turn,
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district court (over QCIs objections) to be August 2006
the date that QCI first became aware of the 981 Patent
and was therefore first potentially liable for active in-
ducement of infringement. See Global-Tech Appliances,
Inc. v. SEB S.A., 131 S. Ct. 2060, 2068 (2011) (holding
that knowledge of the patent is necessary to prove active
inducement of infringement).
A. The First Trial
The damages theory advanced by LaserDynamics in
the first trial was presented chiefly through LaserDynam-
ics expert, Mr. Emmett Murtha. Mr. Murtha opined thata running royalty of 2% of the total sales of laptop com-
puters by QCI is what the parties would have agreed to as
a reasonable royalty had they engaged in a hypothetical
negotiation in August 2006. This opinion was based on
Mr. Murthas understanding, obtained primarily from
LaserDynamics other expert witnesses, that the technol-
ogy covered by the 981 Patent provided an important and
valuable function that was present in all ODDs currently
in use, and that the presence of this function was a pre-
requisite for any laptop computer to be successful in the
marketplace. Since QCI sold laptop computers and notODDs, Mr. Murtha viewed the complete laptop computer
as an appropriate royalty base.
To arrive at his 2% per laptop computer royalty rate,
Mr. Murtha began by finding that 6% would be a reason-
able royalty rate to pay with respect to an ODD alone.
Mr. Murtha reached his conclusion of a 6% per ODD
royalty by relying on comparable rates in two separate
licensing programs involving DVDs where the rates were
3.5 in one case and 4 percent in another case. A621,
A650-54.3 The two patent licensing programs were un-
3 Citations to A herein refer to pages of theJoint Appendix filed by the parties.
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dertaken by third parties in the DVD industry around
2000. Id. He also relied on a very comprehensive royalty
survey that was done by the Licensing Executive Society
in 1997, which he viewed as a standard textbook for
people who are seeking to set reasonable royalty rates.
Id. The licensing survey was not limited to any particular
industry but was across whatever technologies were
being licensed by the people who responded, and sug-
gested that in general, across all of those unrelated tech-
nologies, for a minor improvement, we would charge 2 to
5 percent. For a major improvement, we would charge 4
to 8 percent. And for a major breakthrough, 6 to 15percent . . . . A653-54. There is no evidence in the record
that the two third-party licensing programs or the indus-
tries involved in the licensing survey included the pat-
ented technology or even involved optical disc
discrimination methods. Seeid.; A652 ([T]he two licens-
ing programs are important, because they indicate the
going rate, if you will, at least for those patents, which
may or may not be as important as the one in question.)
(emphasis added); A653 (Q. Was the [licensing] survey
directed to ODD technology? A. No.).
Mr. Murtha did not deem the sixteen lump sum li-
censes that were entered into between LaserDynamics
and various electronics companies between 1998 and 2001
to establish a royalty rate for the 981 Patent. Although
he conceded that QCI would absolutely be aware of
these prior agreements in a hypothetical negotiation
context, he dismissed any probative value of these 16
licenses because they were entered into before the August
2006 hypothetical negotiation date. He reasoned that, by
2006, the DVD market was larger and more established
such that the value of the patented technology was betterappreciated and LaserDynamics had more bargaining
power.
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Based on his discussions with LaserDynamics other
experts, Mr. Murtha concluded that the patented technol-
ogy in the ODD is responsible for one-third of the value of
a laptop computer containing such an ODD. Thus, he
arrived at his 2% per laptop computer rate simply by
taking one-third of the 6% rate for the ODD. When Mr.
Murthas proffered 2% running royalty rate was applied
to QCIs total revenues from sales of laptop computers in
the United States$2.53 billionthe resulting figure
presented to the jury was $52.1 million.
By contrast, QCIs theory of damages was that a lump
sum of $500,000 would be a reasonable royalty. QCIsexpert, Mr. Brett Reed, found the 16 licenses in evi-
denceall lump sums ranging between $50,000 and
$266,000to be highly indicative of the value of the
patented technology according to LaserDynamics, and of
what a reasonable accused infringer would agree to pay
for a license.
Prior to the first trial, QCI filed a motion for partial
summary judgment, or in the alternative a motion pursu-
ant toDaubert v. Merrell Dow Pharmaceuticals, Inc., 509
U.S. 579 (1993), with respect to damages. QCI sought tolimit damages to a one-time lump sum of $232,376.00
based on LaserDynamics prior licenses, and to preclude
Mr. Murtha from offering any opinion to the contrary for
being unreliable by ignoring this established licensing
practice. QCIs motion heavily criticized Mr. Murthas
opinions for being fundamentally inconsistent with La-
serDynamics licenses in either form or amount. How-
ever, QCIs motion did not challenge Mr. Murthas one-
third apportionment calculation to go from his 6% rate
per ODD to his 2% rate per laptop computer, nor did it
challenge his use of a completed laptop computer as a
royalty base. The district court never ruled on QCIs
motion. QCI also moved in limine to preclude testimony
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regarding damages in excess of $266,000 or suggesting
that the prior 16 licenses did not establish a royalty rate.
The district court denied this motion. At no point during
the first trial did QCI object to or seek to limit Mr.
Murthas testimony relating to his apportionment or
royalty base selection, nor did QCI file a pre-verdict
motion for judgment as a matter of law (JMOL) impli-
cating such issues pursuant to Federal Rule of Civil
Procedure 50(a).
Two other issues arose during the first trial that are
pertinent to this appeal: (1) the district courts instruc-
tions to the jury concerning QCIs position regarding itsbuy/sell arrangements, and (2) the adequacy of LaserDy-
namics proof of infringement. We discuss each issue in
turn.
1. The District Courts Instruction to the Jury
Upon perceiving a change in position by QCI concern-
ing the frequency with which QCIs ODDs were obtained
via a buy/sell arrangement, the district court instructed
the jury as follows:
[P]rior to yesterday, the position of Quanta Com-puters was that this buy/sell arrangement . . .
[was] one of the ways in which . . . they did their
business. Yesterday, the testimony was, for the
first time, that that was the predominant method
of doing business. You are instructed that this
constitutes a significant change in the testimony,
and no documents have been produced to support
that, and that you may take this instruction into
account in judging the credibility of all of this wit-
ness testimony and all other Quanta Computers
positions in this case.
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A34-35. A prior ruling from the magistrate judge permit-
ted QCI to utilize a demonstrative showing how a buy/sell
arrangement works conditioned on the Defendants
representation that they would use the demonstratives to
show generally one way that QCI obtains optical drives.
A5100. QCI believed the district courts later instruction
was based on a false premise that QCI had changed its
position. Prior to trial, LaserDynamics was made aware
of QCIs contention that approximately 85% of its ODD
purchases were through buy/sell arrangements. The
testimony elicited by QCI at trial was ostensibly consis-
tent with this contention, representing that QCI obtainsdrives from its customers more frequently than from
ODD sellers. A754. Arguing that QCI did not run afoul
of the earlier magistrate judges condition that the de-
monstrative show only one way QCI obtains its drives,
QCI viewed the district courts instruction unfairly preju-
dicial and moved for a new trial on that basis. QCIs
motion for a new trial on these grounds was denied.
2. QCIs Challenge to the Proof of Infringement
QCI challenged LaserDynamics contentions that the
end users of the ODDs directly infringed the 981 Patent.Asserted claim 3 of the 981 Patent includes the step of
processing an optical signal reflected from encoded pits
on an optical disk . . . . The district court construed the
phrase encoded pits on an optical disk to mean depres-
sion[s] in the surface of the disk which represent[] data or
information. LaserDynamics, Inc. v. Asus Computer Intl,
No. 2:06-cv-348-TJW-CE, 2008 U.S. Dist. LEXIS 63498, at
*13 (E.D. Tex. Aug. 18, 2008) (Markman Order). The
subsequent claimed step of collating the processed optical
signal with an optical disk standard data which is storedin a memory was construed to mean comparing the
processed optical signal with an optical disk standard
data stored on a memory. Id. at *15. The Markman
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Order further explained that there is no requirement
that the same optical signal determine both the total
number of data layers and also pit configuration stan-
dard. Id. According to LaserDynamics expert, industry
standards require that each type of optical disc (i.e., CD,
DVD, etc.) has a particular arrangement of depressions
within the data layer as well as a particular depth of the
data layer from the surface of the disc, such that the
depth and arrangement of depressions have a one-to-one
correspondence. LaserDynamics theory of infringement
was that the optical signal in the accused ODDs included
a counter value that tracked the time for the ODD tochange focus from the transparent outer surface of the
disc to the internal data layer. When the counter value
was compared with a known threshold counter value for a
given type of optical disc, the type of disc (including its
standard arrangement of depressions) could be identified.
QCI filed a motion for JMOL of non-infringement, ar-
guing that the ODDs in its laptop computers, by measur-
ing a counter value of time, were not literally measuring
an arrangement of depressions, which QCI contended was
required by the language of claim 3 and the districtcourts claim constructions. Specifically, QCI notes claim
3 requires a step of settling modulation of servomecha-
nism means dependent upon the optical disk standard
data which corresponds with the processed optical signal,
which the district court construed as establishing the
regulation of the automatic feedback control system for
mechanical motion dependent upon the recognized ar-
rangement of depressions for an optical storage medium
which corresponds to the processed optical signal.
Markman Order at *16. QCI alleged that this construc-
tion indicates that the reference to operating the servo-mechanism based on optical disk standard data requires
the ODD to identify a spatial valuethe recognized
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arrangement of depressionsnot to calculate a temporal
counter value in order to discriminate between optical
disc types. A3190. The district court denied QCIs motion
for JMOL, finding no basis to disturb the jurys infringe-
ment verdict.
B. The First Jury Verdict and Post-Trial
Proceedings
The jury ultimately returned a verdict finding QCI li-
able for active inducement of infringement, and awarded
$52 million in damages to LaserDynamics, almost the
exact amount proffered by Mr. Murtha. After the verdict,QCI filed a motion for a remittitur or new trial pursuant
to Federal Rule of Civil Procedure 59(a). In this motion,
QCI argued that the verdict was grossly excessive and
against the great weight of the evidence, and for the first
time argued that Mr. Murthas testimony should have
been excluded due to his unreliable methodology in apply-
ing the entire market value rulei.e., using the reve-
nues from sales of the entire laptop computers as the
royalty basewithout having established that the pat-
ented feature drives the demand for the entire laptop
computer. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538,1549 (Fed. Cir. 1995). In other words, QCI argued that
LaserDynamics failed to establish that the disc discrimi-
nation method covered by claim 3 of the 981 Patent was
the basis for customer demand for the laptop computers.
Id.
The district court granted QCIs motion, finding that
LaserDynamics had indeed improperly invoked the entire
market value rule. LaserDynamics, Inc. v. Quanta Com-
puter, Inc., No. 2:06-cv-348-TJW-CE, 2010 U.S. Dist.
LEXIS 56634 (E.D. Tex. June 9, 2010) (New Trial Op.).The district court reasoned that [t]he price of the finished
computers should not have been included in the royalty
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base [because] LaserDynamics presented no evidence that
its patented method drove the demand for QCIs finished
computers. Id. at *9. At best, LaserDynamics had only
established that almost all computers sold in the retail
market include optical disc drives and that customers
would be hesitant to purchase computers without an
optical disc drive. Id. at *10. LaserDynamics theory in
the first trial was thus found to violate Rite-Hite as well
as our then-recent decision in Lucent Techs., Inc. v. Gate-
way, Inc., 580 F.3d 1301 (Fed. Cir. 2009),4 which further
expounded on the entire market value rule. The district
court concluded that the $52 million damages award wasunsupportable and excessive, and granted QCIs motion.
Id. at *12-13. Because the district court did not view Mr.
Murthas 6%-per-ODD royalty as clearly excessive, La-
serDynamics was given the option of a new trial on dam-
ages or a remittitur to $6.2 million, which was calculated
using the 6% royalty rate applied to each ODD sold as
part of QCIs laptop computers. Id. at *11-13. LaserDy-
namics declined to accept the remittitur to $6.2 million
and elected to have a new trial.
C. The Second TrialPrior to the second trial on damages, QCI renewed its
objections to the anticipated testimony of Mr. Murtha
concerning his dismissive view of the existing licenses to
the 981 Patent, and challenged his 6% royalty rate based
on ODD average price for being improperly based on non-
comparable licensing evidence. QCI also expressly chal-
lenged Mr. Murthas 2% royalty applying the entire
market value rule, relying on our decisions in Lucent
Technologies, 580 F.3d 1301, and Uniloc USA, Inc. v.
Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011). QCIs
4 Lucent was issued two months after the jury ver-dict but before QCIs new trial motion was filed.
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objections regarding the application of the entire market
value rule were sustained. LaserDynamics, Inc. v.
Quanta Computer, Inc., No. 2:06-cv-348-TJW-CE, 2011
U.S. Dist. LEXIS 42590, at *8 (E.D. Tex. Jan. 7, 2011)
(Mr. Murtha's opinions that a reasonable royalty is 2% of
the entire market value of a computer, and that a disk
drive constitutes a third of the value of the computer, are
excluded.). The district court permitted LaserDynamics
to put on evidence regarding a 6% running royalty dam-
ages model based on ODD average price, but subject to
certain restrictions regarding proof of comparability to the
hypothetically negotiated license. LaserDynamics, Inc. v.Quanta Computer, Inc., No. 2:06-cv-348-TJW-CE, at 3
(E.D. Tex. Jan. 19, 2011) ([T]he court DENIES Quantas
cross-motion to preclude Laser from arguing that a run-
ning royalty is appropriate.); LaserDynamics, 2011 U.S.
Dist. LEXIS 42590, at *10 (permitting Mr. Murtha to rely
on the 1997 Licensing Executive Society survey to allude
to general practices, such as preference for a running
royalty or a lump sum, but [not to] testify as to the royalty
rates discussed in the survey); id. at *11 (ordering that, if
seeking to present licenses as comparable to the jury, [i]t
is not sufficient to state that both patents cover opticaldisk drive technology. The plaintiff must establish the
functionality enabled by the patent-in-suit as well as the
functionality purportedly covered by the licensed patent
and compare their economic importance).
Before the second trial, QCI also filed a motion in
limine to exclude the 2006 BenQ settlement agreement
from evidence for having its probative value substantially
outweighed by the danger of unfair prejudice or confusion
of the issues under Federal Rule of Evidence 403. QCIs
motion emphasized the unique circumstances of the BenQsettlement that rendered it non-comparable, as it was
executed shortly before trial and after BenQ had been
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repeatedly sanctioned by the district court. QCI also
challenged the probative value of any per unit royalty
rate that might be extrapolated from the BenQ settle-
ment, which involved only a one time lump sum royalty
payment of $6 million. The district court denied QCIs
motion, reasoning that LaserDynamics could use the
BenQ agreement to prove up a per unit royalty rate from
the information provided in the agreement so as to
support its 6% per ODD royalty rate. LaserDynamics,
Inc. v. Quanta Computer, Inc., No. 2:06-cv-348-TJW-CE,
at 3 (E.D. Tex. Jan. 19, 2011).
In light of these rulings, LaserDynamics offered tes-timony that damages should be $10.5 million based on a
running royalty of 6% of the average price of a standalone
ODD. While the average per-unit ODD price utilized in
the first trial was the $28 mask price, LaserDynamics
now used a $41 per ODD value that was calculated based
on a relatively small sample of about 9,000 licensed non-
infringing drives made by Sony that were sold as re-
placement drives by QCI. In response to QCIs objections,
LaserDynamics contended that this increased value was
accurate and reliable because prior to the first trial bothQSI and QCI were accused of inducing infringement.
According to LaserDynamics, the prices of QSIs ODDs
and QCIs laptop computers were evaluated to support
LaserDynamics damages theory going into the first trial
since it was not until after the district courts rulings in
the Pre-Trial Opinion that LaserDynamics dropped its
claims against QSI. Going into the second trial, however,
only QCI was accused of active inducement, and so the
price of ODDs sold by QCI became a more central issue.
Since QCI does not itself make and sell standalone ODDs,
and since QCI presented no representative sales price,LaserDynamics used the average price of the replacement
ODDs sold by QCI. QCI nevertheless contends that this
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LASERDYNAMICS v. QUANTA COMPUTER 20
$41 price is far too high since the evidence is undisputed
that mask price of $28 paid by QCI is always higher than
the actual price of the ODD.
QCIs expert testified that the appropriate damages
amount was a lump sum payment of $1.2 million, based in
large part on the fact that none of the now twenty-nine
licenses in evidence (excluding the BenQ settlement)
exceeded lump sum amounts of $1 million. Based on
evidence that QCI could have switched from QSI drives to
other licensed ODD suppliers to avoid infringement at a
cost of $600,000, QCIs expert also opined that QCI would
have paid twice that amount to have the freedom to useODDs from any supplier.
The jury ultimately awarded a lump sum amount of
$8.5 million in damages. QCI moved for JMOL on the
grounds that the hypothetical negotiation date had been
improperly set as August 2006, thatthe evidence at trial
did not support the jurys award of $8.5 million, and that
LaserDynamics had failed to offer proof at trial to support
its $10.5 million damages theory. The district court
denied QCIs motion for JMOL.
* * *
LaserDynamics appealed the district courts granting
QCIs motion for a new trial and/or remittitur based on
the entire market value rule. QCI cross-appealed the
district courts denial of a new trial on the alternative
ground of the district courts allegedly prejudicial instruc-
tion to the jury. QCI also cross-appealed the district
courts entry of summary judgment on the issues of im-
plied license and patent exhaustion, its denial of QCIs
motion for JMOL of non-infringement following the first
trial, and its denial of QCIs motion for JMOL following
the second trial. We have jurisdiction pursuant to 28
U.S.C. 1295(a)(1).
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III. DISCUSSION
For issues not unique to patent law, we apply the law
of the regional circuit where this appeal would otherwise
lie, which in this case is the Fifth Circuit. i4i Ltd. Pship
v. Microsoft Corp., 598 F.3d 831, 841 (Fed. Cir. 2010).
Thus, the grant or denial of a motion for a remittitur or a
new trial is reviewed for an abuse of discretion. Brunne-
mann v. Terra Intl, Inc., 975 F.2d 175, 177 (5th Cir.
1992); Bonura v. Sea Land Serv., Inc., 505 F.2d 665,669
(5th Cir. 1974). Evidentiary rulings are reviewed for an
abuse of discretion. Industrias Magromer Cueros Y Pieles
S.A. v. La. Bayou Furs, 293 F.3d 912, 924 (5th Cir. 2002).
Decisions on motions for summary judgment and JMOL
are reviewed de novo. Cambridge Toxicology Group v.
Exnicios, 495 F.3d 169, 173, 179 (5th Cir. 2007).
For reasons explained in detail below, we hold: (a)
that the district court properly granted a new trial on
damages following the first jury verdict; (b) that the
district court erred in finding that QCI does not have an
implied license to assemble and sell laptops using ODDs
purchased via Philips and Sony/NEC/Optiarc; (c) that the
district court properly denied QCIs motion for JMOL ofnon-infringement; (d) that the district courts jury instruc-
tion does not alone warrant a new trial on liability; (e)
that the district court erred by setting the hypothetical
negotiation date as August 2006; (f) that the district court
erred in admitting the BenQ settlement agreement into
evidence; and (g) that the district court erred in permit-
ting Mr. Murtha to offer his opinion concerning a 6% per
ODD running royalty rate based on ODD average price as
a proper measure of reasonable royalty damages in the
second trial. We address each of these issues in turn.
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A. The District Court Properly Granted a New
Trial on Damages
LaserDynamics contends that the district court erred
by granting QCIs motion for a new trial on damages after
the conclusion of the first trial. Essentially, LaserDynam-
ics believes that the district court was precluded from
ordering a new trial under the circumstances, since QCI
never raised its entire market value rule argument until
after the jury verdict, and thereby waived any right to
seek a new trial to rectify that error. Moreover, LaserDy-
namics denies that it improperly relied on the entire
market value rule during the first trial, but contends that
it instead used a permissible product value apportion-
ment method. LaserDynamics Br. at 36-44. We disagree
with both of LaserDynamics arguments.
1. The Entire Market Value Rule
We begin by noting that some products are made of
many different components, one or more of which compo-
nents may be covered by an asserted patent, while other
components are not. This is especially true for electronic
devices, which may include dozens of distinct components,many of which may be separately patented, the patents
often being owned by different entities. To assess how
much value each patented and non-patented component
individually contributes to the overall end producte.g., a
personal computercan be an exceedingly difficult and
error-prone task.
By statute, reasonable royalty damages are deemed
the minimum amount of infringement damages adequate
to compensate for the infringement. 35 U.S.C. 284.
Such damages must be awarded for the use made of theinvention by the infringer. Id. Where small elements of
multi-component products are accused of infringement,
calculating a royalty on the entire product carries a
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considerable risk that the patentee will be improperly
compensated for non-infringing components of that prod-
uct. Thus, it is generally required that royalties be based
not on the entire product, but instead on the smallest
salable patent-practicing unit. Cornell Univ. v. Hewlett-
Packard Co., 609 F. Supp. 2d 279, 283, 287-88 (N.D.N.Y.
2009) (explaining that counsel would have wisely aban-
doned a royalty base claim encompassing a product with
significant non-infringing components. The logical and
readily available alternative was the smallest salable
infringing unit with close relation to the claimed inven-
tionnamely the processor itself.).The entire market value rule is a narrow exception to
this general rule. If it can be shown that the patented
feature drives the demand for an entire multi-component
product, a patentee may be awarded damages as a per-
centage of revenues or profits attributable to the entire
product. Rite-Hite, 56 F.3d at 1549, 1551. In other words,
[t]he entire market value rule allows for the recovery of
damages based on the value of an entire apparatus con-
taining several features, when the feature patented
constitutes the basis for customer demand. Lucent, 580F.3d at 1336 (quoting TWM Mfg. Co. v. Dura Corp., 789
F.2d 895, 901 (Fed. Cir. 1986)). The entire market value
rule is derived from Supreme Court precedent requiring
that the patentee . . . must in every case give evidence
tending to separate or apportion the defendants profits
and the patentees damages between the patented feature
and the unpatented features, and such evidence must be
reliable and tangible, and not conjectural or speculative.
Garretson v. Clark, 111 U.S. 120, 121 (1884). The Court
explained that the entire value of the whole machine, as
a marketable article, [must be] properly and legallyattributable to the patented feature. Id.
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LASERDYNAMICS v. QUANTA COMPUTER 24
In effect, the entire market value rule acts as a check
to ensure that the royalty damages being sought under 35
U.S.C. 284 are in fact reasonable in light of the tech-
nology at issue. We have consistently maintained that a
reasonable royalty analysis requires a court to hypothe-
size, not to speculate. . . . [T]he trial court must carefully
tie proof of damages to theclaimed inventions footprint in
the market place. ResQNet.com, Inc. v. Lansa, Inc., 594
F.3d 860, 869 (Fed. Cir. 2010). A damages theory must be
based on sound economic and factual predicates. Riles v.
Shell Exploration & Prod. Co., 298 F.3d 1302, 1311 (Fed.
Cir. 2002). The entire market value rule arose andevolved to limit the permissible scope of patentees dam-
ages theories.
Importantly, the requirement to prove that the pat-
ented feature drives demand for the entire product may
not be avoided by the use of a very small royalty rate. We
recently rejected such a contention, raised again in this
case by LaserDynamics, and clarified that [t]he Supreme
Court and this courts precedents do not allow considera-
tion of the entire market value of accused products for
minor patent improvements simply by asserting a lowenough royalty rate. Uniloc, 632 F.3d at 1319-20 (ex-
plaining that statements in Lucent suggesting otherwise
were taken out of context). We reaffirm that in any case
involving multi-component products, patentees may not
calculate damages based on sales of the entire product, as
opposed to the smallest salable patent-practicing unit,
without showing that the demand for the entire product is
attributable to the patented feature.
Regardless of the chosen royalty rate, one way in
which the error of an improperly admitted entire market
value rule theory manifests itself is in the disclosure of
the revenues earned by the accused infringer associated
with a complete product rather than the patented compo-
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LASERDYNAMICS v. QUANTA COMPUTER25
nent only. In Uniloc, we observed that such disclosure to
the jury of the overall product revenues cannot help but
skew the damages horizon for the jury, regardless of the
contribution of the patented component to this revenue.
Id. at 1320 (noting that the $19 billion cat was never put
back into the bag, and that neither cross-examination
nor a curative jury instruction could have offset the
resulting unfair prejudice). Admission of such overall
revenues, which have no demonstrated correlation to the
value of the patented feature alone, only serve to make a
patentees proffered damages amount appear modest by
comparison, and to artificially inflate the jurys damagescalculation beyond that which is adequate to compensate
for the infringement. Id.; see 35 U.S.C. 284.
Turning to the facts of this case, LaserDynamics and
Mr. Murtha unquestionably advanced an entire market
value rule theory in the first trial. Mr. Murtha opined
that a 2% running royalty applied to QCIs total revenues
from sales of laptop computers in the United States
$2.53 billionwas an appropriate and reasonable royalty.
The resulting figure presented to the jury was $52.1
million, and the jury awarded damages in nearly thatexact amount. Whether called product value apportion-
ment or anything else, the fact remains that the royalty
was expressly calculated as a percentage of the entire
market value of a laptop computer rather than a patent-
practicing ODD alone. This, by definition, is an applica-
tion of the entire market value rule.
LaserDynamics use of the entire market value rule
was impermissible, however, because LaserDynamics
failed to present evidence showing that the patented disc
discrimination method drove demand for the laptop
computers. It is not enough to merely show that the disc
discrimination method is viewed as valuable, important,
or even essential to the use of the laptop computer. Nor is
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LASERDYNAMICS v. QUANTA COMPUTER 26
it enough to show that a laptop computer without an ODD
practicing the disc discrimination method would be com-
mercially unviable. Were this sufficient, a plethora of
features of a laptop computer could be deemed to drive
demand for the entire product. To name a few, a high
resolution screen, responsive keyboard, fast wireless
network receiver, and extended-life battery are all in a
sense important or essential features to a laptop com-
puter; take away one of these features and consumers are
unlikely to select such a laptop computer in the market-
place. But proof that consumers would not want a laptop
computer without such features is not tantamount toproof that any one of those features alone drives the
market for laptop computers. Put another way, if given a
choice between two otherwise equivalent laptop com-
puters, only one of which practices optical disc discrimina-
tion, proof that consumers would choose the laptop
computer having the disc discrimination functionality
says nothing as to whether the presence of that function-
ality is what motivates consumers to buy a laptop com-
puter in the first place. It is this latter and higher degree
of proof that must exist to support an entire market value
rule theory.
Our decision in Lucent is illustrative. There, the pat-
ent at issue involved a helpful and convenient date
picker feature that was being used within the grand
scheme of Microsofts Outlook email software. We held
that because the patented feature was but a tiny feature
of one part of a much larger software program, a royalty
could not be properly calculated based on the value of the
entire Outlook program because there was no evidence
that anybody anywhere at any time ever bought Outlook .
. . because it had [the patented] date picker. Lucent, 580F.3d at 1332-33 (emphasis added).
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In this case, Mr. Murtha never conducted any market
studies or consumer surveys to ascertain whether the
demand for a laptop computer is driven by the patented
technology. On the record before us, the patented method
is best understood as a useful commodity-type feature
that consumers expect will be present in all laptop com-
puters. There is no evidence that this feature alone
motivates consumers to purchase a laptop computer, such
that the value of the entire computer can be attributed to
the patented disc discrimination method. As the district
court aptly stated, [a]t best, LaserDynamics proved only
that almost all computers sold in the retail marketinclude optical disc drives and that customers would be
hesitant to purchase computers without an optical disc
drive. New Trial Op. at *10. The district court correctly
found that this evidence fails to satisfy the requirements
of our precedent to support the usage of the entire market
value rule when calculating reasonable royalty damages.
Furthermore, Mr. Murthas one-third apportionment
to bring his royalty rate down from 6% per ODD to 2% per
laptop computer appears to have been plucked out of thin
air based on vague qualitative notions of the relativeimportance of the ODD technology. The district court
correctly concluded that [a]lthough [LaserDynamics]
argues that the many activities that may be performed on
a computer using a disk drive, such as playing movies,
music and games, transferring documents, backing up
files, and installing software comprise a third of the value
of a computer, [Mr. Murtha] offers no credible economic
analysis to support that conclusion. LaserDynamics,
2011 U.S. Dist. LEXIS 42590, at *6. This complete lack of
economic analysis to quantitatively support the one-third
apportionment echoes the kind of arbitrariness of the25% Rule that we recently and emphatically rejected
from damages experts, and would alone justify excluding
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LASERDYNAMICS v. QUANTA COMPUTER 28
Mr. Murthas opinions in the first trial. Cf. Uniloc, 632
F.3d at 1318 (Geminis starting point of a 25 percent
royalty had no relation to the facts of the case, and as
such, was arbitrary, unreliable, and irrelevant. The use of
such a rule fails to pass muster underDaubert and taints
the jurys damages calculation.).
Finally, we reject the contention that practical and
economic necessity compelled LaserDynamics to base its
royalty on the price of an entire laptop computer. La-
serDynamics Br. at 15-18. LaserDynamics emphasizes
that QCI is in the business of assembling and selling
complete laptop computers, not independent ODDs, andthat QCI does not track the prices, revenues, or profits
associated with individual components. Likewise, La-
serDynamics points out that QCI purchases ODDs for a
mask price, which the district court described as nomi-
nal and essentially an accounting fiction that offers
little evidence of the drives actual value. LaserDynam-
ics, Inc. v. Quanta Computer, Inc., No. 2:06-cv-348-TJW-
CE (E.D. Tex. Jan. 21, 2011). LaserDynamics further
points to Mr. Murthas testimony that, in his prior experi-
ence working in patent licensing at IBM, IBM would oftenbase royalties on entire products to address such account-
ing difficulties. Thus, LaserDynamics concludes that the
parties would have had to use the value of the entire
laptop computer as the royalty base in structuring a
hypothetical license agreement, as it reflects the only true
market value of anything that QCI sells.
LaserDynamics overlooks that a per-unit running
royalty is not the only form of a reasonable royalty that
the parties might have agreed to in a hypothetical nego-
tiation. An alternate form is evidenced by the many
license agreements to the 981 Patent in the record for
lump sum royalties that are not calculated as a percent-
age of any component or product, which immediately
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belies the argument that using a laptop computer as the
royalty base is necessary. LaserDynamics necessity
argument also fails to address the fundamental concern of
the entire market value rule, since permitting LaserDy-
namics to use a laptop computer royalty base does not
ensure that the royalty rate applied thereto does not
overreach and encompass components not covered by the
patent. That is, if difficulty in precisely identifying the
value of the ODDs is what justifies using complete laptop
computers as the royalty base, when it comes time to then
apportion a royalty rate that accounts for the ODD con-
tribution only, the exceedingly difficult and error-pronetask of discerning the ODDs value relative to all other
components in the laptop remains.
Moreover, LaserDynamics provides no reason that
QCIs own lack of internal tracking and accounting of
individual components or its mask price purchases
precludes LaserDynamics from deriving or obtaining
accurate information concerning ODD values from third
parties, industry practices, etc. LaserDynamics in fact
did obtain and use alternative pricing information from
Sony-made ODDs in the second trial. As explained below,this Sony-made ODD pricing information was not per se
unreliable, as the jury was entitled to weigh it against
QCIs competing views of appropriate ODD pricing. Thus,
we see no reason to establish a necessity-based exception
to the entire market value rule for LaserDynamics in this
case.
2. The Grant of a New Trial
Having established that LaserDynamics theory of
damages was legally unsupportable, we turn to the ques-
tion of whether the district court abused its discretion ingranting QCIs post-verdict motion and offering LaserDy-
namics a choice between a new damages trial and a
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remittitur of the damages verdict to $6.2 million. While
LaserDynamics is correct that QCI made no pre-verdict
objection or raised any challenge whatsoever to Mr.
Murthas testimony on an entire market value rule the-
ory, under Fifth Circuit law this ostensible waiver by QCI
does not preclude the district court from exercising its
discretion to consider the issue. See Garriott v. NCsoft
Corp., 661 F.3d 243 (5th Cir. 2011) (finding that an oth-
erwise waived argument made in a motion for a new trial
was properly addressed and preserved when the district
court exercised its discretion to consider the issue in its
opinion denying the motion).The Fifth Circuit has determined that [a] district
court has discretion to consider new theories raised for
the first time in a post-trial brief, . . . and an issue first
presented to the district court in a post-trial brief is
properly raised below when the district court exercises its
discretion to consider the issue. Quest Medical, Inc. v.
Apprill, 90 F.3d 1080, 1087 (5th Cir. 1996) (citations
omitted). In this case, whether or not the district court
could have deemed QCIs entire market value rule argu-
ments waived and ignored them, it did not. In light ofQCIs post-trial briefing, the district court identified the
error of permitting the entire market value rule theory to
go to the jury, and exercised its discretion to correct the
error. We find no abuse of discretion in the district courts
decision to grant QCIs motion for a remittitur or a new
trial under these circumstances, and we therefore affirm
the district court on this point.
B. QCI Has an Implied License to Assemble Lap-
tops Using ODDs from QSI via Philips and
Sony/NEC/Optiarc
QCI contends that it has an implied license to assem-
ble laptop computers for its customers that include the
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accused ODDs assembled by QSI for Philips or
Sony/NEC/Optiarc, pursuant to Philipss and
Sony/NEC/Optiarcs have made rights under their
patent license agreements with LaserDynamics. The
QSI-assembled ODDs at issue are sold by Philips or
Sony/NEC/Optiarc either directly to QCI or indirectly to
QCI via QCIs customers such as Dell and HP, as directed
by QCIs customers. The existence velnon of an implied
license is a question of law that we review de novo.
Anton/Bauer, Inc. v. PAG, Ltd., 329 F.3d 1343, 1348 (Fed.
Cir. 2003).
At oral argument before this court, counsel for QCIexplained that the vast majority of the allegedly infring-
ing ODDs would be covered under QCIs implied license
theory, and that QCIs arguments concerning patent
exhaustion pertain to only those same ODDs. Oral Arg.
at 0:30-1:30, available at
http://oralarguments.cafc.uscourts.gov/default.aspx?fl=20
11-1440.mp3. Because we find that QCI has an implied
license, we do not reach QCIs patent exhaustion argu-
ments.5
5 At oral argument before this court, counsel for La-serDynamics for the first time argued that the districtcourt merely denied QCIs summary judgment motion onthese issues, but did not also enter summary judgmentagainst QCI, and that such a supposed denial of summary
judgment cannot be appealed to us after a trial whereQCI did not take further steps to preserve the issue. Oral
Arg. at 11:18-13:57. QCIs briefing repeatedly character-ized the district courts order as entering summary judg-ment against QCI, but LaserDynamics made no challengeto this characterization until oral argument. A subse-quent motion refining this argument and seeking todismiss these portions of QCIs appeal for lack of jurisdic-tion was filed on March 23, 2012.
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The district court relied solely on E.I. Du Pont de Ne-
mours & Co. v. Shell Oil Co., 498 A.2d 1108 (Del. 1985), in
finding that the Quanta defendants do not have an
implied license with respect to drives that are manufac-
tured by QSI and eventually sold to QCI (or another
Quanta entity), notwithstanding the fact that those drives
are sold through Philips or Sony/NEC/Optiarc, two of
[LaserDynamics] licensees. Pre-Trial Op. at *4 (citing
Du Pont, 498 F.3d at 1116). According to the district
court, [t]he effect of such transactions is to grant an
impermissible sublicense. Id. We disagree.
In Du Pont, E.I. Du Pont de Nemours and Company,Inc. (Du Pont) had entered into a license agreement
with Shell Oil Company (Shell) permitting Shell to
make, have made, use and sell for use or resale an
LaserDynamics belated argument hinges on an incor-rect premise. The district courts order plainly wentfurther than denying QCIs motion and made affirmativerulings on these issues as a matter of law. SeeLaserDy-namics, 2009 U.S. Dist. LEXIS 115848, at *3-5. Thedistrict court indicated that for purposes of trial, the
court advises the parties of the following holdings, e.g.,the Quanta defendants do not have an implied licensewith respect to drives that are manufactured by QSI andeventually sold to QCI (or another Quanta entity), not-withstanding the fact that those drives are sold throughPhilips or Sony/NEC/Optiarc, two of [LaserDynamics]licensees. Id. Thus, LaserDynamics citing to Ortiz v.Jordan, 131 S. Ct. 884, 889 (2011), for the propositionthat an appellate court has no jurisdiction over a denial ofsummary judgment following a trial on the merits is to noavail. Fed. R. Civ. P. 56(f) permits the district court toenter summary judgment in favor of a non-moving party,and LaserDynamics points to nowhere in the recordwhere it objected to any procedural defect in the districtcourts doing so. On this record, we see no genuine dis-putes of material fact that would preclude us from revers-ing the district court on the implied license issue.
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insecticide product covered by Du Ponts patent. 498 A.2d
at 1110. The license agreement expressly prohibited any
sublicensing by Shell. Id. Union Carbide Agricultural
Corporation, Inc. (Union Carbide) later sought permis-
sion from Shell to produce the patented insecticide, but
Shell declined due to the prohibition on sublicensing in its
licensed agreement with Du Pont. Id. at 1111. Instead,
Shell and Union Carbide came up with the following
arrangement: (1) Union Carbide would manufacture the
insecticide under the have made provision of the license
agreement between Shell and Du Pont, then (2) Shell
would immediately sell back the insecticide to UnionCarbide pursuant to Shells right to sell for use or re-
sale. Id. at 1111. The minimum amounts of insecticide
that Union Carbide agreed to make and the minimum
amounts that Shell agreed to sell back to Union Carbide
were identical. Id. at 1115-16. The Supreme Court of
Delaware deemed this arrangement an impermissible
sublicense, rather than a permissible exercise of Shells
have made and sell rights, because ultimately, Union
Carbide was producing [the insecticide], not for Shell, but
rather for itself. Id. (citing Carey v. United States, 326
F.2d 975, 979 (Ct. Cl. 1964) (explaining that the test is,whether the production is by or for the use of the original
licensee or for the sublicensee himself or for someone
else)).
The case before us presents a different situation from
that in Du Pont. The ODDs provided to QCI via Philips
and Sony/NEC/Optiarc were undoubtedly assembled by
QSI for Philips and Sony/NEC/Optiarc, not for QSI or
QCI. Even though the ODDs made by QSI were in reality
shipped directly from QSI to QCI, the substance of the
transactions make clear that QSIs manufacture of theODDs was limited to the needs and requests of Philips
and Sony/NEC/Optiarc. QSI had no unfettered ability to
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make more ODDs than were ordered from it. Nothing in
the record suggests that this overall arrangement is
designed to circumvent the terms of the patent licenses
between LaserDynamics and Philips or
Sony/NEC/Optiarc. Indeed, the shipping and manufactur-
ing arrangements involved in this case reflect typical on-
time delivery logistics of modern industrial reality.
The apposite precedent is our decision in Cyrix Corp.
v. Intel Corp., 77 F.3d 1381 (Fed. Cir. 1996). That case
involved Cyrix Corporation (Cyrix), a designer and seller
of microprocessors, contracting with other companies to
manufacture integrated circuit chips containing theCyrix-designed microprocessors, then selling the chips
back to Cyrix. Id. at 1383. Cyrix used manufacturers
that were licensed under patents owned by Intel, includ-
ing SGS-Thomson Microelectronics, Inc. (ST). Id. ST
had acquired by assignment a license from Intel to make,
have made . . . [and] sell the patented chips. Id. ST
could not itself fulfill Cyrixs orders, however, and, relying
on its have made rights, arranged for its Italian non-
subsidiary affiliate company (ST-Italy) to manufacture
the chips, which ST then sold to Cyrix. Id. The districtcourt distinguished this situation from that in Du Pont
and held that ST did not exceed its rights under the Intel
license by having ST-Italy make the chips for ST to sell to
Cyrix. Id. at 1384. Cyrix and ST were both found to not
infringe Intels patents on this basis.
We affirmed, rejecting Intels argument that the ar-
rangement among ST, ST-Italy, and Cyrix was a mere
paper transactiona sham designed to circumvent
Intels license to ST. Id. at 1387-88. We endorsed the
district courts reasoning that, unlike in Du Pont, [t]he
production of the [chips] is for the use of ST, the original
licensee, and not for the use of ST-Italy. Id. at 1387. As
we explained, [i]f the facts in this case had been that
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Cyrix made the product for ST under STs have made
rights and then ST sold the product back to Cyrix, then
they would have been analogous to those in du Pont, but
those are not our facts.Id. at 1388.
This case likewise presents no sham transaction as
in Du Pont. QSI made the ODDs at issue here to fulfill
bona fide orders from licensees Philips and
Sony/NEC/Optiarc. The ODDs were then sold to QCI by
the licensees. QCI did not make the ODDs for Philips or
Sony/NEC/Optiarc and then immediately purchase the
ODDs back so as to effectively receive a sublicense and
obtain as many ODDs as it wanted. Rather, as in Cyrix,the manufacture of the ODDs by QSI and their eventual
sale to QCI for incorporation into laptop computers, all
via Philips and Sony/NEC/Optiarc, were legitimate and
separate business transactions that did not expand or
circumvent the patent licenses. Id. at 1387-88 (The two
agreements, one permitting ST-Italy to manufacture
microprocessors for ST and the other providing for STs
sale of microprocessors to Cyrix, were separate business
transactions.). Both the manufacture and sale of the
ODDs were valid exercises of the have made and sellrights, respectively, under the license agreements in this
case. We therefore conclude that QCI has an implied
license to the 981 Patent with respect to the ODDs made
by QSI and sold to QCI via Philips or Sony/NEC/Optiarc.
C. The District Court Properly Denied QCIs Mo-
tion for JMOL of Non-Infringement
QCI contends that LaserDynamics evidence at the
first trial was inadequate to prove direct infringement by
end users of the accused laptops of asserted claim 3 under
the district courts claim constructions. As discussedabove, claim 3 requires, interalia, the steps of processing
an optical signal reflected from encoded pits on an optical
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LASERDYNAMICS v. QUANTA COMPUTER 36
disk until total number of data layers and pit configura-
tion standard of the optical disk is identified and collat-
ing the processed optical signal with an optical disk
standard data which is stored in a memory. The district
court construed the phrase encoded pits on an optical
disc to mean depression[s] in the surface of the disc
which represent[] data or information Markman Order,
at *13. The step of collating the processed optical signal
with an optical disk standard data which is stored in a
memory was construed to mean comparing the proc-
essed optical signal with an optical disk standard data
stored on a memory. Id. at *15.QCI does not challenge the district courts claim con-
structions, but only whether the trial record supports the
jurys verdict of infringement. Contrary to QCIs argu-
ment, nothing in these claim constructions dictates that
the arrangement of depressions be identified or recog-
nized in any particular manner. Substantial evidence
exists to show that the industry standards for various
optical discs require specified arrangements of the de-
pressions horizontally as well as specified depths of the
data layers. The record amply supports that the depth ofthe data layer precisely correlates to the pit configuration
arrangement, such that the measurement of the depth
(via a counter value) is a measurement of the pit ar-
rangement. Under the claim constructions, the jury was
entitled to find infringement on this basis, and we there-
fore affirm the district courts denial of QCIs motion for
JMOL of non-infringement.
D. The District Courts Jury Instruction Does Not
Alone Warrant a New Trial on Liability
As discussed above, upon perceiving a change in posi-tion by QCI concerning the frequency with which QCIs
ODDs were obtained via a buy/sell arrangement, the
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LASERDYNAMICS v. QUANTA COMPUTER37
district judge instructed the jury as follows: this consti-
tutes a significant change in the testimony, and no docu-
ments have been produced to support that, and that you
may take this instruction into account in judging the
credibility of all of this witness testimony and all other
Quanta Computers positions in this case. A34-35. QCI
contends that this instruction so unfairly prejudiced QCI
that only a new trial could rectify the error.
Since QCI did not object at trial, we review the dis-
trict courts instruction for plain error. Rodriguez v.
Riddell Sports, Inc., 242 F.3d 567, 579 (5th Cir. 2001).
Plain error is clear or obvious and must affect sub-stantial rights. Id. (quoting United States v. Calverley, 37
F.3d 160, 162-64 (5th Cir. 1994)). Such error is reversible
only if it seriously affect[s] the fairness, integrity, or
public reputation of judicial proceedings. Id. (citations
omitted). Although a district court is afforded broad
discretion over the manner in which trial is conducted,
and may intervene to help expand upon or clarify witness
testimony and evidence, such intervention may not come
at the cost of strict impartiality. Id. (quoting United
States v. Saenz, 134 F.3d 697, 702 (5th Cir. 1998)). Thus,[i]n reviewing a claim that the trial court appeared
partial, this court must determine whether the judge's
behavior was so prejudicial that it denied the [defendant]
a fair, as opposed to a perfect, trial. Id. (citations and
internal quotation marks omitted). In performing this
review, we must consider the district courts actions in
light of the entire trial record and consider the totality of
the circumstances. Saenz, 134 F.3d at 702.
Our review of the record shows that QCI made differ-
ent representations concerning the frequency with which
its ODD purchases were made via buy/sell arrangements.
It is not the same to suggest that a certain method is one
way business is done when in fact it is the predominant
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LASERDYNAMICS v. QUANTA COMPUTER 38
way85% of the timethat business is done. Neverthe-
less, the district courts response to this potential incon-
sistency was harsh and prejudicial to QCI. The question
of whether there was any inconsistency here, and the
associated questions of credibility, should have been for
the jury to decide. It is one thing to point out a potential
inconsistency to the jury and to raise an associated ques-
tion of credibility. But it was error to instruct the jury to
take this instruction into account in judging the credibil-
ity of . . . all other Quanta Computers positions in this
case. A34-35 (emphasis added).
Notwithstanding whether there was any inconsis-tency in QCIs positions, on the balance, we do not view
the district courts instruction to constitute plain error
that standing alone warrants a new trial. QCI was given
a second trial on the issue of damages, which cured any
prejudice that the district courts instruction might have
caused in that regard. As for infringement liability, a
portion of the case put on through entirely different
witnesses, we are not convinced that the instruction, in
context, was so severe as to prevent QCI from a receiving
a fair, as opposed to a perfect, trial on infringement.Rodriguez, 242 F.3d at 579 (citations omitted). However,
if the same testimony is introduced at a subsequent trial,
the court must leave to the jury the decision whether any
inconsistency exists.
E. The District Court Erred By Setting the
Hypothetical Negotiation Date as August 31, 2006
During both trials, QCI was bound by the district
courts ruling that the hypothetical negotiation date for
purposes of the Georgia-Pacific reasonable royalty analy-
sis was August 2006i.e., when the lawsuit was filed.The district court reasoned that since QCI was being
accused of active inducement of infringement, which
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LASERDYNAMICS v. QUANTA COMPUTER39
requires knowledge of the patent, and since QCI was not
notified of the patent until August 2006, this date was
when QCI first became liable to LaserDynamics. Based in
large part on this late date, LaserDynamics expert Mr.
Murtha testified that he disregarded almost all of La-
serDynamics twenty-nine licenses in evidence that were
executed earlier, reasoning that the economic landscape
had since changed.
We have explained that [t]he correct determination
of [the hypothetical negotiation] date is essential for
properly assessing damages. Integra Lifesciences I, Ltd.
v. Merck KGaA, 331 F.3d 860, 870 (Fed. Cir. 2003). Ingeneral, the date of the hypothetical negotiation is the
date that the infringement began. See Georgia-Pacific,
318 F. Supp. at 1123. We have consistently adhered to
this principle. See,e.g., Applied Med. Res. Corp. v. U.S.
Surgical Corp., 435 F.3d 1356, 1363-64 (Fed. Cir. 2006)
([T]he hypothetical negotiation relates to the date of first
infringement.); State Indus., Inc. v. Mor-Flo Indus., Inc.,
883 F.2d 1573, 1580 (Fed. Cir. 1989) (The determination
of a reasonable royalty . . . [is based] on what a willing
licensor and licensee would bargain for at hypotheticalnegotiations on the date infringement started.).
We have also been careful to distinguish the hypo-
thetical negotiation date from other dates that trigger
infringement liability. For example, the six-year limita-
tion on recovery of past damages under 35 U.S.C. 286
does not preclude the hypothetical negotiation date from
taking place on the date infringement began, even if
damages cannot be collected until some time later. See
Wang Labs., Inc. v. Toshiba Corp., 993 F.2d 858, 870 (Fed.
Cir. 1993). Similarly, the failure to mark a patented
product or prove actual notice of the patent pursuant to
35 U.S.C. 287 precludes the recovery of damages prior to
the marking or notice date, but the hypothetical negotia-
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LASERDYNAMICS v. QUANTA COMPUTER 40
tion date may nevertheless be properly set before marking
or notice occurs. Id. ([T]he court confused limitation on
damages due to lack of notice with determination of the
time when damages first began to accrue, and it is the
latter which is controlling in a hypothetical royalty de-
termination.). In sum, [a] reasonable royalty determi-
nation for purposes of making a damages evaluation must
relate to the time infringement occurred, and not be an
after-the-fact assessment. Riles v. Shell Exploration &
Prod. Co., 298 F.3d 1302, 1313 (Fed. Cir. 2002) (citing
Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075,
1079 (Fed. Cir. 1983) (The key element in setting areasonable royalty . . . is the necessity for return to the
date when the infringement began.)).
Here, there is no dispute that while QCI first became
liable for active inducement of infringement in August
2006, QCIs sales of accused laptop computers into the
United States began causing the underlying direct in-
fringement by end users in 2003. From the premise that
the hypothetical negotiation must focus on the date when
the infringement began, Hanson, 718 F.2d at 1079, we
note that active inducement of infringement is, by defini-tion, conduct that causes and encourages infringement.
35 U.S.C. 271(b) (Whoever actively induces infringe-
ment of a patent shall be liable as an infringer.). While
active inducement can ultimately lead to direct infringe-
ment, absent direct infringement there is no compensable
harm to a patentee. SeeAro Mfg. Co. v. Convertible Top
Replacement Co., 377 U.S. 476, 500 (1964) (It is true that
a contributory infringer is a species of joint-tortfeasor,
who is held liable because he has contributed with an-
other to the causing of a single harm to the plaintiff.).
Thus, we hold that in the context of active inducement ofinfringement, a hypothetical negotiation is deemed to
take place on the date of the first direct infringement
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LASERDYNAMICS v. QUANTA COMPUTER41
traceable to QCIs first instance of inducement conduct
in this case, 2003.
Our holding is consistent with the purpose of the hy-
pothetical negotiation framework, which seeks to discern
the value of the patented technology to the parties in the
marketplace when infringement began. In considering
the fifteen Georgia-Pacific factors, it is presumed that the
parties had full knowledge of the facts and circumstances
surrounding the infringement at that time. Indeed, the
basic question posed in a hypothetical negotiation is: if, on
the eve of infringement, a willing licensor and licensee
had entered into an agreement instead of allowing in-fringement of the patent to take place, what would that
agreement be? This question cannot be meaningfully
answered unless we also presume knowledge of the patent
and of the infringement at the time the accused induce-
ment conduct began. Were we to permit a later notice
date to serve as the hypothetical negotiation date, the
damages analysis would be skewed because, as a legal
construct, we seek to pin down how the prospective in-
fringement might have been avoided via an out-of-court
business solution. See Wordtech Sys. v. Integrated Net-works Solutions, Inc., 609 F.3d 1308, 1319 (Fed. Cir.
2010) (The hypothetical negotiation attempts to ascer-
tain the royalty upon which the parties would have
agreed had they successfully negotiated an agreement
just before infringement began, and necessarily involves
an element of approximation and uncertainty. (quoting
Lucent, 580 F.3d at 1324-25)). It also makes sense that in
each case there should be only a single hypothetical
negotiation date, not separate dates for separate acts of
infringement, and that a direct infringer or someone who
induced infringement should pay the same reasonableroyalty based on a single hypothetical negotiation analy-
sis.
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Lastly, QCI points out that the accused ODDs were
manufactured by QSI as early as 2001, and urges us to
deem 2001 the date of first infringement for the hypo-
thetical negotiation. However, it is QCI that is accused of
active inducement here, and the record shows that QCI
and QSI are related but independently operated compa-
nies, and that QCI does not own a controlling interest in
QSI. Thus, there is no basis on which to further push
back the hypothetical negotiation date to 2001. SeeBMC
Res., Inc. v. Paymentech, LP, 498 F.3d 1373, 1380-82 (Fed.
Cir. 2007) (declining to impute responsibility for allegedly
infringing conduct from one party to another).Because our decision alters the time period when the
analysis under Georgia-Pacific is to take place, we re-
mand for a new trial on damages pursuant to the 2003
hypothetical negotiation date with respect to those ac-
cused laptop computers not encompassed by QCIs implied
license as discussed above.
F. The District Court Erred in Admitting the
BenQ Settlement Agreement
Before the second trial, QCI filed a motion in limineseeking to exclude the 2006 LaserDynamics-BenQ settle-
ment agreement from evidence pursuant to Federal Rule
of Evidence 403. QCIs motion emphasized the unique
circumstances of the BenQ settlement, which was entered
into on the eve of trial after BenQ had been repeatedly
sanctioned by the district court. We conclude that the
district court abused its discretion in denying QCIs
motion and allowing the agreement into evidence.
Rule 403 provides for the exclusion of otherwise rele-
vant evidence when the probative value of that evidence
is substantially outweighed by the danger of unfair preju-
dice, confusing the issues, or misleading the jury. Along
these lines, Federal Rule of Evidence 408 specifically
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prohibits the admission of settlement offers and negotia-
tions offered to prove the amount of damages owed on a
claim. The propriety of using prior settlement agree-
ments to prove the amount of a reasonable royalty is
questionable. See, e.g., Rude v. Westcott, 130 U.S. 152,
164 (1889) ([A] payment of any sum in settlement of a
claim for an alleged infringement cannot be taken as a
standard to measure the value of the improvements
patented, in determining the damages sustained by the
owners of the patent in other cases of infringement.);
Deere & Co. v. Intl Harvester Co., 710 F.2d 1551, 1557
(Fed. Cir. 1983) (holding that as the White license wasnegotiated against a backdrop of continuing litigation and
[defendants] infringement of the Schreiner patent, the
district court could properly discount the probative value
of the White license with regard to a reasonable royalty);
see also Hanson, 718 F.2d at 1078-79 (observing that
license fees negotiated in the face of a threat of high
litigation costs may be strongly influenced by a desire to
avoid full litigation and should not be considered evi-
dence of an established royalty (quotingPanduit Corp. v.
Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1164 n.